Five People Who Shouldn't Convert To A Roth IRA

Unlike traditional IRAs, which are paid
pre-tax and incur taxes on every withdrawal, you pay the current
tax rate on Roth contributions and aren't taxed on any future
withdrawals as long as you meet certain
qualifications.

What's confusing for consumers isn't weighing the pros and cons of Roth IRAs as
much as the concept. It's the choice between leaving savings in a
traditional IRA or converting them into a Roth account of their
own.

We asked ChFC Mike Piershale, resident retirement expert
and president of Piershale Financial Group, to explain
who should steer clear of Roths.

People expecting to use their IRA as income in
retirement. If you're approaching retirement or and
need to draw funds from the IRA to live on, it's not wise to
convert to a Roth, Piershale says. Why? "Converting to a Roth
costs money and it takes a certain number of years before the
money you pay upfront is justified by the tax savings," he says.
"This timeline is greatly increased if you're taking
income." (Use a Roth conversion calculator like this to get
an idea of whether you're better off converting.)

Anyone who can't afford it. If you have to use
funds from your traditional IRA in order to pay the taxes it will
cost you to convert to a Roth, you're better off letting the
funds sit tight. "This is a huge and very reasonable reason not
to do a Roth conversion," Piershale says. "It just wouldn't make
sense."

Those who will retire in a lower income tax bracket than
they're in now. For example, an IRA owner in the 25
percent tax bracket today (making about $70,700 in taxable income
for those married and filing jointly), it wouldn't make sense to
pay 25 percent on a Roth IRA conversion if you're planning to
retire in the 15 percent tax bracket. "It'll be cheaper to wait
until you retire and convert at a 15 percent tax rate, which will
result in substantial tax savings," he says. "That's a huge tax
savings."

Parents who don't want to cut their kids a deal.
One of the perks of Roth IRAs is that they are excellent vehicles
when uses trusts as beneficiaries. That's because trusts
typically trigger a lot more taxes on a let less income. But with
a Roth, heirs can make withdrawals forever without tax penalties.
"You're leaving a sweeter deal to your kid if you leave them a
Roth IRA than if you leave them a traditional IRA," Piershale
says. "They can set up something called an inherited IRA."

Anyone who doesn't want to pay the income tax
upfront. Piershale himself admits the thought of
converting his traditional IRA into a Roth stings when he
considers how much he'll be paying upfront in taxes. It's a
common concern that keeps some IRA owners from making the switch.
"Can you imagine someone has a $300,000 IRA and right upfront
they're giving up $75,000 of that IRA?" he says. "[A Roth IRA
conversion may] look good on paper when you're running a pure
math calculation but in the real world, a lot of things happen.
They have a health problem or something happens where they need a
lot more money a lot faster."